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Offline RE

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Energy-Money Equilibrium: The Value of Money in the Age of Oil
« on: February 27, 2012, 10:11:40 PM »
Trying to figure out exactly how any Money achieves and holds its value is very
difficult. In all but the most simple systems which are little more than
Barter, you quickly develop a level of complexity that is confounding, mainly
because it is always so self-referential. In this exercise, I'm going to try to
elucidate the process used over the centuries to not just Create Money, which is
primary, but also to Control Money once created. I have some basic ideas here,
but I have no idea how this post will come out in the end. It's a very
difficult problem.

Starting Point: You can't have Money without Surplus in Basic Needs, but
neither is Surplus by itself sufficient. You also have to have control over at
least One basic conduit of Wealth, which is in the Begining Food. Why is this
so?

First look at a pre-Agricultural Hunter-Gatherer Society. Said society can be
in Surplus, but they don't need or use money, because each member of the society
can take from the surplus as much as he or she needs. You may Barter things,
but you do not need an intermediary of money to do that. Its a very simple
system, but allows for virtually no Savings, and none are necessary as long as
you always have and expect surplus. A small group of H-Gs in a large territory
not competing with others are always in surplus. So no Money develops in such a
society.

The Ag society though as soon as it develops REQUIRES money. First thing is,
the Ag Society develops a Surplus even beyond that of the H-G society, so much
so that the population begins to expand rapidly. The Ag system also works on a
seasonal level where large amounts of Grain are collected up at harvest time and
must be stored in Warehouses. Such intitial efforts are Communal, with a Tribe
all working together on a Patch of land to farm it. To do so though, they must
Claim Ownership over that land. This requires then the next level, a Military
to protect and defend that land.

Its at this point you have the 3 most necessary elements involved for the
beginning of a Monetary system. One is Ownership of the Land, at first Communal
by the Tribe as a whole. Second is Storage of large quantities of Food in a
Warehouse. 3rd is developing a Military group responsible for protecting both
your land you grow on and the goods stored in the warehouse.

The Military component quckly becomes the most Dominant one, in the early stages
led by the most powerful Warrior who all in the tribe respect and fear. This
person become "King". Call him Nimrod. The King then becomes the Symbol of the
State, and all it "owns" and "produces" (really "controls" and "extracts")
belongs to him. The monetary system develops as a means for the King to
distribute out surplus to his Loyal Subjects.

The money develops when the Counting begins in the Warehouse of Grain. Whatever
is in there is represented in the Count by Credits, which can then be symbolized
in a token. Only as many Tokens are produced as there is grain to cover them in
redemption. Precious metal coinage works well for this in the beginning. All
the precious metals the King has acquired by whatever means care coined up, and
appropriately valued so that there are not more coins than Grian that can be
redeemed. This is Hard Money in extremis. It has an absolute value measured in
the Food it represents.

The King can now hand out the Tokens to his Military protectors and also pay the
oversears of slaves or serfs who work the land and grow the food. These folks
are not paid in coinage, they merely get a small portion of the food they
produce for subsistence living.

Problems arise as the society grows. In the beginning, the surplus of food being
produced exceeds the amount of precious metals available for coinage, so the
food drops in price. A few things can happen here, one is that the King can
stop paying out so much coinage to his Military and Overseer classes, raising
the price of the food up again, allowing the King to keep more Precious metal in
the treasury and more food in the warehouse. Everybody is still beign fed here,
King has more in the Treasury, and besides that surplus in the grain warehouse
grows. It keeps a pretty long while, but eventually will rot or simply become
ridiculous to save any more of. Like putting up more than a few years of Preps,
it gets ridiculous.

So you start to Trade the surplus with others who don't produce so much food and
expansion begins of the system. Peripheral areas pay in more Gold and Silver
and also begin to produce other things besides food which the Money becomes
useful for paying for.

At this point the system has become vastly more complex. The Tokens no longer
represent an absolute amount of Grain in a warehouse, but rather the value of
all Goods and Services being produced in this ever growing system. Bourses or
Trading Markets develop which set relative values for everything being done in
the society, which as it increases in size and velocity needs a rapidly
increasing Money supply to handle. The Precious metal coinage does not increase
at the same rate in most circumstances, so in order to have more "money"
available, base metals are used to produce some coins, which pretty much can be
produced at will. Money is getting softer during this period, but so long as Da
Goobermint doesn't go wild coining up the base metals, it doesn't devalue while
the system is expanding.

The trading system begins to undergo many stressors at this point. Regardless
of whether there is some whether or plague related Famine or not, at times some
folks in control of large swaths of land simply take them out of production,
locally raising the cost of grain. This allows them to extract out more
precious metals from the buyers, and this money goes into their Basement Safes.
I'm sure you can see the analogue here with how Oil prices get manipulated by
creating periodic "shortages", even if there is plenty of Oil in the ground.

The "successful' society utilizing Money has now reached the point where there
is just a ton of Surplus in the society, so much so that there isn't a whole lot
of need for Workers or paying people much coinage and most of the PMs are
sequestered away inthe Basement Safes of a few Pigmen. At this point though,
some folks cannot even get hold of the few base metal coins to buy any food,
though there is plenty in the warehouse. The society needs no more Serfs, nor
does it even need more Artisans and Toolmakers. Only a few of the most
successful of these are necessary for the King and his Oligarchy, so these New
Professions start to see Unemployment also, along with Serfs. The economy slows
to a crawl, basically because it produced too much surplus too quickly, and then
developed an overburden of a population with no remunerative work available.

Social Discontent rises here amongst the Poor, at which point it becomes
necessary to "Give Away" the surplus to these folks or face a Revolution.
Except soon as you do start "giving it away", the Money loses further meaning.
Why work as a Soldier and put your life onthe line for a few coins when Bread
and Circuses are beign provided to the masses to keep them quiet and
entertained? The Roman period of Bread & Circuses has the direct analogue of
the Great Society program through to just recently.

Eventually, regardless of actual production or extraction ability of food outta
da ground or Oil under da ground, production of both begins to fall because
there is no money flowing around the market which will buy it. Now you really
DO get your Revolts, which really do require you to start increasing the size of
the Army and handing out money from the Treasury, until the Treasury is bankrupt
of PMs. Now, there are Gold coins inthe hands of the Soldiers, but there is
little being produced to buy with those Gold coins. At this point, you reach
the end of the line for this iteration of a cycle, and not until the Wars and
internal conflicts get resolved can you begin a rebuilding process to do the
same thing over again.

The whole process here has occurred countless number of times since Nimrod, and
for so long as there always was a real Surplus in the environment, the only
thing that caused the famine and scarcity problem was the collapse of the
monetary system.

This iteration is different than those were. The repeated expansions and
collapses culminated with the discovery and exploitation of fossil fuel
resource, which put the entire globe into such great Surplus that it rapidly
expanded in population numbers consuming this last great resource base. Upon
its collapse, what is left out there isn't enough to expand on again after just
the typical wars knocking down Biblical numbers of around 25% of the population.

The monetary system doesn't really collapse from Scarcity normally, it collapses
from too much Surplus and hoarding of currency. Periodically though due to
overextension and resource depletion in specific locations along with the
vicissitudes of Nature, real scarcity does rear its head, which causes a
collapse from the opposite direction. In this case, money may be circulating in
the economic system, but it is a shortage of goods rather than a shortage of
money which produces the disruption. The end result isn't much different since
you still end up with a situation where extant money won't buy goods, but the
causative factors are different.

The Period we are working into now is a synergy of both problems, on the Global
Scale. On the one hand, there is a consolidation of Money going on removing
much of it from real circulation through the Banking System; while at the SAME
time resources are depleting on a global level. As long as these two parameters
move in tandem, you get a shrinkage, but not a collapse. You only get a
collapse when on the gross level BOTH fail, and that has yet to occur. When it
does occur though, its a lot worse than one or the other of the other types of
collapse.

In this last iteration of the cycle, rather than Food in Warehouses serving as
the underlying basis of Money, the Thermodynamic Energy of Fossil Fuels
underpinned the money. This by extension through the Industrial Food Apparatus
includes Food, but food is only part of the total production of the society.
Over time, food becomes arbitraged out of value, since all it does is support
"Useless Eaters". Rather than produce more food, the monetary system serves to
encourage the production of more Fuel, to perpetuate itself. Thus you get your
Ethanol production for Carz reather than Corn for Peoples.

This is a Dynamic Shrinkage Model, basically serving to reduce population while
at the same time conserving resource, which very well might be a planned
methodology and could work assuming the circulating money and available energy
resource decline in near parallel terms. The problem it suffers is one of
instability all along the way. Because the monetary system serves as a proxy
for value for many OTHER things besides just fossil fuel energy, malinvestment
through the system can collapse the monetary system too fast to maintain a
stable equilibrium with the collapsing energy supplies. Obvious example for
this problem is the collapsing McMansion Market, but it extends into Carz,
Factories and many other "Assets". Unless those assets can be halted from
complete collapse in value, the money supply can't be shrunk at the steady rate
necessary to pace out to energy supply shrinkage. You then run into the old
problem of plenty of resource available relative to the population, but
insufficeint working money to distribute said resource.

This of course is why we see the process occuring of the CBs pushing out Credit
to keep the energy market from locking up completely. They are just trying to
keep pace with the real shrinkage, but not issue so much credit as to render the
currencies dependent on the credit markets to completely lose value either. Its
a system under great stress here on a daily basis.

As long as linearity can be maintained between the energy markets and the money
supply, the system can continue to function, albeit in ever smaller "boutique"
economies all the time. The linearity gets disrupted either by a local implison
of a given credit market or by a local disruption of Oil supply of a threshold
level magnitude. Uncelar how large that disruption has to be on an absolute
value level to reach the threshold, but one suspects that either a Blockade of
the Straights of Hormuz on the Energy Level or the credit collapse of a country
the size of say Italy would be sufficient here to disturb the equilibrium too
much and send the relative economics into a tailspin.

Money and Oil are EQUIVALENTS in the current society, mainly as defined by the
Dollar as the most popularly accepted Proxy for Oil. To keep the overall system
running at any level, even a small Boutique level, a parity must be maintained
between the currency and the available energy. To do that, a vast portion of
the population has to be cut off from Credit to buy the Oil, but not so fast
that the money loses its value or so fast as the Oil depletes in its availabilty
at reasonable EROEI. its a Tightrope that has to be walked very carefully.

So far, our Illuminati Masters have walked the Wire very well. I do not discount
the possibility they can walk the wire to the Other Side and maintain the
equilibrium all the way through the spin down. This is POSSIBLE. IMHO though,
it is Unlikely. Much like catching a Raindrop on a Knife Edge and controlling
how the water splits up, the level of instability here is simply too great. One
side or the other of the Energy-Money Equation will exceed controllable
parameters, and then you get a Cascade Failure. Whe that occurs, all Bets are
OFF. There is no maintaining a Core in such a situation, there IS no "core".

I cannot say this one is "Coming Soon to a Theatre Near You." I can only say to
you IMHO that it IS Coming and will come inevitably, just as even the biggest
Mountains inexorably are washed into the Sea. You must not despair here and
think all is lost, with the outcomes Inevitable and Written in Stone. They are
not. You just have to be patient and WAIT for the Failure of the Conduits, for
when they do fail in earnest, it will be a different ballgame altogether. Fail
they will. I GUARANTEE it.

RE
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Offline RE

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Energy-Money Equilibrium II: The Modern Era and the Jenga Paradox
« Reply #1 on: February 29, 2012, 10:47:12 PM »
In the first part of this series, I took a Big Picture view of how money comes
to be created from the resource base of a society, in the beginning Food. In
the Age of Oil, the money serves as a more direct Proxy for Energy in the form
of Fossil Fuels. This because food production is subsidiary to energy
production, since with copious avaialble energy copious food can be produced
through the Industrialized food apparatus. In this part, we will look at the
relationship as it evolved through to today between the Money and Energy, along
with its Military component.

The conversion of money into a proxy for the energy markets came about through
the mid-19th century with the monopolization of the Oil Industry by Standard
Oil. With the vast amount of Oil under its control, in order to then be able to
sell that Oil there needed to be a vast expansion of Credit issued to the
population to buy this Oil. This is why the Oil Biz and the Banking Biz are so
closely intertwined. Essentially, John D. Rockefeller of Standard Oil began
increasing Dollar Credit available so that then people would have Money
available to buy his Oil. The Oil at this time is priced very cheap relative to
the credit price of the money, and the expansion of the Ponzi begins.

In the beginnning this was very chaotic, because it was happenning during the
"Free Banking" era between the collapse of the 2nd Bank of the FSofA and the
institution of Da Federal Reserve. During this period, Gold was also
functioning as a resource based money, a holdover from the Ag Era when Gold in
limited quantity could be used to represent total food available to a
population. Many smaller banks popped up issuing credit on a fractional reserve
basis of their Gold holdings, but inside a manipulated energy market, their bets
often went bad causing repeated Bank Runs and periods of Depression, with little
circulating money available to the population.

Da Federal Reserve was created as a means to more directly control the total
outward flow of Credit in conjunction with the increasing supply of Oil coming
online in the late 19th Century and early 20th Century FSofA. The most powerful
Banks of the Era chartered Da Fed as a Central Bank which could control the
creation of credit, which they could then use as a cheap source of funds to loan
out at a higher rate of interest. This removed some of the chaos from the
system, putting just a few very well positioned Pigmen in control of money
creation and money flow. These folks are also the same ones in control of the
Oil biz itself.

Besides the production of Cheap Food, the greatest usefulness of Oil and the
Energy contained therein lays in the Mechanized War Machine. Once built, large
Warships and Tanks can pretty much roll over any backwater civilization out
there and then expand into their locations for the purpose of further resource
extraction. Prime target for this right from the get-go were vast Oil Fields
being discovered in MENA. A Rapid grab for Oil amongst Indutrialized Nations of
Europe began, basically with the Krauts and the Brits seeking to gain hegemony
over the Oil fields of MENA, since unlike the FSofA they had little to none of
it on their own land. This prior to discovery of North Sea Oil of course.

So, skirmishes down in MENA between the Brits and Krauts over who "owns" what
territories down there eventually leads us to WWI, which the Krauts lose mainly
because the Brits have the FSofA taking their back here. Many mistakes are
made in the Treaty of Versailles, their is a brief period of Mania with the
Roaring 20s back in the FSofA following this war, but it never really ends.
Back in Krautland, they experience the Roaring 20s as basically a time of
Roaring Hyperinflation. Even in the FSofA, while F. Scott Fitzgerald and the
Great Gatsby are doing well cateloguing the lifestyle of the Rich & Famous in
the Hamptons, back in the Heartland of the FSofA Farmland is rapidly losing its
value as industrialized apparatus makes it possible to create copious amounts of
food from much less land and labor. They have plenty of food to ship over to
starving Krauts, but the Krauts have no working money to buy it with. WWII
comences shortly thereafter, with the FSofA entering the fray when over on the
Pacific side of this now Global battle over industrialization and Oil the Nips
with their backs to the wall go Kamikaze on Pearl Harbor.

Both Wars are GREAT for the FSofA, in the sense they give plenty of Employment
for J6P in the trenches and also further ramp up the power and influence of the
Military. By the time WWII ends, the FSofA has an ENORMOUS industrial base it
used to make things like Tanks and Planes and Bombs, but now in order for this
stuff not to be complete malinvestment, the owners of said factories turn them
to "peacetime" usage. The Tank factories start producing Carz, the Bomber
Factories start producing 707 passenger Jets, and the Bomb Factories start
producing Ag Fertilizer.

MASSIVE LSPW Projects are undertaken both in Europe in the form of the Marshall
Plan and the FSoA in the form of the Interstate Highway System as a means to
build out the Ponzi, employ vast numbers of workers in construction, which then
becomes the basis for a subsidiary parasite economy of Small Bizness to develop
as the Credit Money flows out copiously, along with the then copiously flowing
Oil, not just from FSofA Oil fields, but also the newly aquired Saudi Fields and
Iranian fields.

Along the way, from the 1950s into the early 1970s it begins to become obvious
to folks like M. King Hubbert that real Oil Production rates and discoveries are
falling and as a result energy prices go on a steady upward climb. The tie to
the old Gold standard Ag economy is broken in 1971 when Tricky Dick closes the
Gold Window and the economy goes All Fiat from that point.

This takes us into the Modern Era of many low level "mini-Wars" which continue
to provide a rationale and purpose for a large Military, as well as the Bubble
Creation period in consumer goods and services and Financial speculation which
keeps Credit flowing Outward, Profits flowing Inward but in reality Zero to
Negative real growth in the system. It becomes ever more Bloated in Global
Population of Useless Eaters, and supplies of new Oil become ever harder to find
and ever more expensive to develop.

The Crisis Point for the Fianancialism came first in the 1990s with the collapse
of the Dot Com Bubble, but was given an Adrenaline Injection through the
Sub-Prime RE Market, Credit Card Loans and Guaranteed Student Loans for Kollege.
Outward flowing credit through these Markets kept the patient alive and kicking
until 2008, when the Chickens came home to Roost on Lehman Brothers.

To salvage THIS problem, the Last Bubble began in earnest, the Sovereign Debt
Bubble. In this iteration, all the non-performing assets are heaped onto the
Tax base of Sovereign states, with the "expectation" that the populations of
these countries will work as Debt Slaves into the generations of their Great
Grandchildren in order to pay off ALL the malinvestment that began way back
there in 1800s, with the building of the Railroads, a necessary infrastructure
for extraction of Coal and Oil.

Issue is of course, in reality all that malinvestment can never be paid off,
because the factories producing the Carz can't sell them to impoverished people
and the McMansions that require the people who live in them to HAVE a car in the
Garage to drive to a Job that is no longer there also are Uninhabitable
Malinvestement. What is left here to blow any Bubbles up on? Only War of
course. In a massive debt default, War is the only way to declare Bankruptcy,
and only the Winner actually can do that. The LOSER still has to pay off his
debts. The Krauts got a bye on this one after WWII and as a result of the
Marshall Plan used their Industrial Plant and Financialism to grow their way
back to prosperity, of course all on the backs of the folks in MENA and their
European brethren to the South, to whom them loaned copious amounts of money to
buy their Mercedes and build Tourist Resorts on the Costa del Sur for German
Pigmen to frolick on over the Summer.

I wrote the following in the first part of this series:

"As long as linearity can be maintained between the energy markets and the money
supply, the system can continue to function, albeit in ever smaller "boutique"
economies all the time. The linearity gets disrupted either by a local implison
of a given credit market or by a local disruption of Oil supply of a threshold
level magnitude. Uncelar how large that disruption has to be on an absolute
value level to reach the threshold, but one suspects that either a Blockade of
the Straights of Hormuz on the Energy Level or the credit collapse of a country
the size of say Italy would be sufficient here to disturb the equilibrium too
much and send the relative economics into a tailspin."

With the Sovereign Debt Bubble in Europe now on its last legs, there just isn't
any bigger Debtor left upon which to shift the burden of debt accumulated since
Industrialism began, mainly in the aftermath of the Civil War here in the FSofA.
Though it began with the Steam Engine in the 1750s, the Agrarian Model was not
completely supplanted by Industrialization until after the Civil War. So we are
talking a good 150 years of debt overburden accumulated here. To wipe out this
debt takes a World War that makes WWII look like a small skrimish in your
backyard between your kids and their cousins. What the FORM of this war will
take though remains to be seen.

What you see occuring here between Iran and the FSoA in the Blustering is mainly
an attempt to keep the price of Oil propped up a while longer. Real demand for
Oil is Cratering as the Konsumers run out of available credit to buy it with.
Military posturing both increases Demand for Oil (how much Oil do you think both
the Iranians and the FSofA consume in a Day of Wargames?), and it instills FEAR
into the Market Place that what is left of the supply is soon to be CUT OFF.

Thing is here, blustering isn't going to increase real demand for Oil from the
Konsumer level, no matter how bellicose either side gets here, J6P STILL does
not have money to buy this stuff at high prices. In fact at ANY price soon
enough, but if they let it drop down to $2/gal for gas again you would get
another Dead Cat Bounce in the economy.

At this price though, the Oil Companies/MIC cannot make a profit, nor can the
Mullahs pay their bills. It is in the interest of neither side to see the price
of Oil drop here. By seriously cutting production the Saudis could SLIGHTLY
raise the price of Oil, but that would be made up for by Ruskies exporting more.
The Saudis though need every Dollar they can get, so they are not going to lower
production and sales. Sell less at a higher price maybe keeps you even, but
only if somebody else doesn't capture your market share. With declining real
demand, only if ALL producers cut their production could you stay even.

So, blustering about War is the best means available to prop up the price in the
Speculator market, but at the end of the line if the price is too high, it won't
move out of the storage facilities fast enough. At this point, blustering is
not enough, you need a REAL War to suck up that excess Oil and to keep the FEAR
level at a Fever Pitch.

It remains to be seen which side Flinches First, but once Fear Mongering stops
working to keep the price up, REAL War becomes necessary. The Price cannot stay
up indefinitely at high levels if the end Konsumer does not have money to pay
for it. Either you go to War to REALLY restrict the supply, or you let the
Price Collapse some. It could go either way here.

Certainly,a Price Collapse would be better for FSofA Konsumers and Industry. it
would not be better for TBTF Banks and Oil Companies though. It would be
horrific for Oil Producing countries dependent on the revenue from Oil to
support their economies. Already weakened Regimes in Saudi Arabia and Iran
would undoubtably collapse if Oil drops into the $60 or below range again. The
Iranians being the most pressured here with Sanctions are the most likely to
strike out if there is a collapse in Oil prices.

The scenario as a result that seems most likely is for the Posturing to continue
for so long as it keeps the prices up, but when the Storage Facilities are full
to the Brim and Overflowing, then the Price will collapse and the Iranians will
strike out first.

The ensuing Melee is simply too complex to figure out. Reduced real Oil
supplies will take many peripheral areas with current Credit issues off the map
as far as any Oil delivery whatsoever is concerned. Greeks for instance won't
be able to buy even a DROP of Oil with the New Drachma. The FSofA likely would
institute a Rationing system of some sort. Normal commerce would slow to a
snail's crawl. Unemployment would skyrocket.

At this point, the War in Iran is likely Small Potatoes, since you'll get
internal Civil Wars and rebellions occuring. This is a Jenga Puzzle Moment.
Currently, the Oil Supply is diminishing SLOWER than the Demand is. A full on
War with Iran would flip that equation, rapidly diminshing supply and
redirecting what is available to the War Effort. The "Oil Shock" to the
Industrialized societies here and in Europe would be beyond belief, a very rapid
change you cannot massage with monetary policy. There is simply no predicting
how it goes after that.

Money and Fossil Fuel Energy became Synonymous as the Industrial Revolution took
hold. The same people who took control of the Oil supply also took control of
the money supply, and matched them up in a time of great Surplus of this
resource. With no apparent rescue of any other form of energy sufficient to
take its place, either Renewable or Nuke based, the Value of Money remains
dependent on the availability of fossil fuels and their distribution and utility
in the society. The distribution will shrink, and the utility will shrink as
less is available to waste. The money supply of any money that actually works
to buy stuff will shrink with this. In theory, this could take a long time, but
is unlikely to do so because of the Jenga Paradox. At the moment, Iran appears
to be the Jenga Piece of the Puzzle, that when it gets pulled will collapse the
Tower of Babel. Ironic of course, since Babylon was situated in present day
Iraq, just a few miles from the site of Baghdad. What Goes Around, comes
Around.

RE
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Offline charlie

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Re: Energy-Money Equilibrium: The Value of Money in the Age of Oil
« Reply #2 on: March 01, 2012, 06:57:57 AM »
Well I got registered;;;;;    But it's going to take me some time to figure out the navigation;;;

charlie

Offline RE

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Re: Energy-Money Equilibrium: The Value of Money in the Age of Oil
« Reply #3 on: March 01, 2012, 01:21:08 PM »
Welcome aboard Charlie!  Let us know about any problems you have with Navigation.

Feel free to post your own Topics and Articles here also, you do not have to only discuss articles published on the DD Blog.

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Re: Energy-Money Equilibrium: The Value of Money in the Age of Oil
« Reply #4 on: September 01, 2012, 09:02:36 PM »
RE,
I know this is an old thread but I just read the article and I wanted to add something to it regarding the Standard Oil Rockefeller influence on this country.
Quote
Essentially, John D. Rockefeller of Standard Oil began increasing Dollar Credit available so that then people would have Money available to buy his Oil. The Oil at this time is priced very cheap relative to the credit price of the money, and the expansion of the Ponzi begins.

Rockefeller established a network of offices in countries (mostly, but not limited to) where the oil was overseas. THAT was the basis of the intelligence services for the USA. The oil pigs ARE the backbone of US intelligence from the word go in the 20th century. I learned this in this book:


Quote
Book review: "
The Tyranny of Oil
The Tyranny of Oil
" by Antonia Juhasz

by Erik Curren
Since the US passed the peak of its domestic oil production in 1970 and then suffered the indignity of the Arab Oil Embargo of 1973-4, policy wonks and advocacy groups alike have presented no shortage of sensible plans to start breaking America's dependence on oil.
But every attempt to implement a rational energy policy has failed because because the major oil companies didn't want America to start using less of their product. And everybody knows that Big Oil owns Washington.

The Tyranny of Oil: The World's Most Powerful Industry--and What We Must Do to Stop It
By Antonia Juhasz
Harper Collins, 468pp, $15.99
We might imagine this thuggish industry answering in the style of movie gangster Little Caesar: "What's that? You say don't like it, punk? So what are you going to do? You and what army are going to say boo to ExxonMobil, Chevron and BP?"
The most powerful racket ever
The oil industry is the world's most profitable -- and America's most powerful. And with peak oil, Big Oil is poised to grow even stronger.
With the multi-millions of dollars they spend every year to elect candidates, lobby Congress and federal agencies and spread their messages to the public through front groups like Americans for Prosperity, think tanks like the American Enterprise Institute and slick marketing campaigns claiming the oil companies are going green, the oil industry may seem harder to take down than a consortium of the Corleone family, the Triad Societies of Macau and the Medellin Cartel led by a triumvirate of Al Capone, Bond super-villain Ernst Stavro Blofeld and Tony Soprano.
But Antonia Juhasz thinks it can and must be done. She wants Americans to start fighting back against the oil industry's control over the federal government. And while we're at it, she wants us to challenge Big Oil's control over the corner gas station and the refinery in the poor community down the road too.
And she thinks our best chance to win against Big Oil is to break them up, just like AT&T, or to take them down for corrupt practices, as the feds did with Enron.
Re-assembling Standard Oil
In the iconic case of corporate breakup from the trust-busting era of Theodore Roosevelt, in 1911 the Supreme Court found Standard Oil guilty of antitrust violations and ordered the company to be broken up. The federal government split John D. Rockefeller's leviathan into 34 companies, including those that later became Exxon, Amoco, Mobil and Chevron.
In the tradition of Ida Tarbell's expose of Rockefeller and his predatory business practices, Juhasz argues that oil companies have once again started to become as big and powerful as Standard Oil was before its breakup. Indeed, culminating in the merger of Exxon and Mobil, many of the former components of Standard have now re-connected, leaving the world with just half a dozen large independent oil companies.
Juhasz also argues that their massive size has enabled the new oil behemoths to become as dangerous to American democracy as the court found Rockefeller's trust to be in 1911, particularly when it comes to squeezing out smaller competitors, strong arming their own retailers and running drilling operations and refineries that are dangerous to workers and to neighboring communities.
She also finds Big Oil to be behind Enron-style price fixing that Juhasz sees as a bigger factor in high prices at the pump than supply-and-demand. Though she does acknowledge peak oil, Juhasz is clearly more worked up about speculators and collusion, for which she makes a convincing case. Even if you think that peak oil will be the driving factor behind rising energy prices in the future, it's easy to accept that in any short-term oil crunch, opportunists will find plenty of chances to squeeze the consumer.
The biggest bar to rational policy
As bad as retail price-fixing and drilling disasters are to drivers, local communities and the environment, if these were the only crimes of ExxonMobil, ConocoPhillips, Shell and the other oil majors, then Big Oil would be no worse than many other extractive industries.
But what makes Big Oil truly a dangerous force is the industry's influence in Washington, which, more than any other factor, has blocked all attempts over the past thirty years to pass a comprehensive policy on the federal level to move America towards clean energy and conservation.

The US has become what Juhasz calls an
"oilgarchy"--a nation in which a small cadre of oil interests governs the most pressing decisions of our time. Consequently oil and gasoline prices are skyrocketing...But this is just the most obvious tip of a much larger iceberg. As oil becomes harder to find, more competitive to acquire, more expensive to produce, and more polluting to refine, we will be further pressed to decide just how far we are willing to go to get the last drops. Will our climate crisis be expanded? Will communities be destroyed? Will more wars be fought?


At the top of Juhasz's plan to dislodge the oilgarchy is to get the Federal Trade Commission, using existing antitrust law, to break up the oil majors into smaller companies that would compete with each other and none of which would ever get large enough to put as much pressure on the federal government as the oil behemoths of today can exert.
Other ways to de-throne Big Oil would include electoral and campaign reform, along the lines of the "Separation of Oil and State" campaign run by Washington, DC-based Oil Change International, which notes that the oil industry gave $114 million in campaign contributions to Congress in the last decade, and that "the 111th Congress could be the dirtiest yet."
Juhasz also urges cuts in federal subsidies to oil companies--which President Obama promised in his 2011 State of the Union speech last month. She also supports reviving industry regulation scrapped in the small government Reagan-era and even starting a national oil company like any number of government-run concerns from Norway to Saudi Arabia that would run drilling and production on federal lands in the public interest rather than for investor profits.
It's the politics, stupid
The Tyranny of Oil hits the problem right on the head. No amount of sensible plans, such as the well-intentioned but politically naive plan recently published by the World Wildlife Fund for the world to run on 95% renewables by 2050, will make much difference as long as Big Oil runs Washington.
We don't need more clean energy plans. We have enough of those already that just sit on the shelf. What we need are more plans to fight the power of Big Oil.
The environmental movement has already spent too much time painting rosy clean-energy scenarios and lusting after electric cars.
Instead, if green groups went all out into fighting dirty-energy politics, then perhaps America's energy policy outlook would not be so bleak. The Sierra Club's campaign against Koch Industries and Greenpeace's zeppelin flight over a secret strategy meeting of big polluters hosted by the Koch brothers in January are a promising start.
Juhasz's book is essential reading for anyone who wants to give the US, and indeed the world, a fighting chance to deal with climate change and peak oil while we still have time.
-- Erik Curren
« Last Edit: September 01, 2012, 09:09:00 PM by agelbert »
Leges         Sine    Moribus      Vanae   
Faith,
if it has not works, is dead, being alone.

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Re: Energy-Money Equilibrium: The Value of Money in the Age of Oil
« Reply #5 on: September 02, 2012, 02:05:12 AM »
RE,
I know this is an old thread but I just read the article and I wanted to add something to it regarding the Standard Oil Rockefeller influence on this country.

It remains a fundamental issue, regardless of the fact I wrote this article a while back.

Don't forget, it is not just John D. Rockefeller you are taling about here.  Oil really gained Hegemony over Industrialized Goobermints  in the earlyu 1900s,  Particularly when Winston Churchill converted the British Navy over to Oil from Coal.  Both WWI and WWII were fought mainly to consolidate Global Oil resource wealth into a few hands, quite successfully. In the succeeding years, the entire POWER of the BAM has been Oil Based.  Yes, there are Nuke Powered Carriers and Subs, but most of the prjected power of the BAM in the form of Death from Above of Drones and Fighters and Bombers all requires the liguid fuels coming fromthe Oil resource.

The BAM is now engaged in the Final Battle for All the Marbles WRT what is LEFT of the Oil resource, to poser that Machine.  A battle it cannot win over the long, even medium term here.  The BAM will starve out the Konsumer Economy of Oil and that will result in the BAM itself losing its integrity.  Once that happens, it is all a big CRAPSHOOT.

The Power of the Industrialists is based on the Thermodynamic Energy of Oil.  Renewables will NOT power Aircraft Carriers or Submarines.  When the available energy falls low enough, the BAM will FRACTURE, and there will be massive die off as well as massive reorganization inthe aftermath.  Little if anything we hold true today will remain true once this occurs.

Coming Soon to a Theatre Near You.

RE
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Economics & Moral Philosophy
« Reply #6 on: October 20, 2012, 10:39:01 PM »
Another ABSOLUTELY FABULOUS article from the FEASTA Website (home to David Korowicz and the Trade-Offs Financial Cross Contagion Paper)  covering a LONG history of Economic thought predating Adam Smith most people are not familiar with.

Included in this one are NUMEROUS Power Point Slides, each one of which itself  pulls the core ideas together in a concise format that newbies to Economic Theory can gain tremendous insight from.  If you click on the slides, you can see them in larger format.

I'd love to put this one up on the Blog, but my last try with FEASTA for a Cross Posting Agreement got no response.  I'll try again with this one.  Meanwhile, I converted it to BBcode to drop in here inside the Diner.

A long read, but well worth the time.  This Sunday Morning Brunch Edition of the Diner is JAM PACKED with reading material!  I will be putting up my Doomer Science Fiction article as well as soon as the clock turns over on the software.

Economics and Moral Philosophy
Sep 10, 2012 No
Comments
by Brian
Davey





Cafe Economique Talk


Presented in Nottingham, UK on 30th August 2012
The talk is
presented below with its accompanying slides. Click on each slide to see a
larger version.
Please note that the notes that go with the power point were
written up after the talk had been given and thus differ slightly from the audio
version. The arguments in the written version are slightly more detailed and the
written version includes references and sources whereas this is not fully the
case in the audio presentation.


Audio file of talk (free registration
required)
Powerpoint
slides




In the late 1960s and early 1970s major university economics departments in
the USA and major economics journals decided to take the history of economic
thought out of the economic syllabus and stop accepting articles on the
subject.


Thus it is that many economists are pretty ignorant about the history of
their own subject. They probably think that Adam Smith, in the 18th century, was
the first economist.


In fact writing, thinking and study about economics goes back to the ancient
Greeks. It was taught in universities in Europe from 1250. This early scholastic
economic was a part of the moral philosophy. Its leading thinkers, St Augustine
and St. Thomas Aquinas, drew upon the writings of Aristotle and sought to unify
his ideas with that of Christian theology.





But why was it a part of moral philosophy? The answer is that economics was
considered to be all about the use of means to attain ends. Nowadays economics
is a topic that I would describe as studying the use of intermediate means to
provide for intermediate ends. However, it typically neglects the integration of
the economy in the physical and natural world on the one hand while at the same
time ignoring the study of what structures and determines our intermediate ends
, namely the study of our ultimate ends. What are these ultimate ends?


To Aristotle you could not even consider this question
without having a view of what is particular to human beings. For him the end of
all human activity is sometimes translated as “happiness” but this can be
misleading to a modern understanding of that word – because what Aristotle meant
by happiness was a very specific idea of living a virtuous life in accordance
with reason. The virtues included personal characteristics like integrity,
honour, loyalty, courage and forthrightness. Ideally life meant developing
oneself and flourished in and through ones dealings and particularly through
participation in the community.


This did involve some need for provisions, and if
fortune was on your side your women and your slaves could take of your needs in
this respect, but Aristotle did not think that happiness involved accumulating
lots of possessions.


To Aristotle the amount of property needed for a good life was limited.
Taking this standpoint he saw there being two kinds of exchange and trade:
exchange in order to satisfy a genuine need; and exchange in order to make money
and accumulate possessions. The latter Aristotle thought of as unnatural, as he
did usury, because it involved money growing without limits which violated the
laws of nature – since everything in nature has limits.


Well, fast forward to Augustine and Aquinas. No doubt
they too turned a blind eye to the power structures of the feudal society in
which they lived but, as monks who had taken vows of poverty, they thought the
reason for living was firstly, as it says in the Ten Commandments, to love God
and also to love your neighbour. Life involved transcending yourself. Well, of
course, this is very different from calculating your individual interest as
assumed by modern economists. Instead it was assumed that you gave to and
provided for the people that you loved and that you exchanged with strangers –
in order, at the next stage, to have the things needed for the people that you
love and for oneself.


To Augustine every person has a choice – to provide his
or her goods for himself or to provide them for other people. This depends on
the love people feel for themselves compared to the love they feel for other
people. Thus distribution at the local and personal level, as economists
describe it, involves a moral choice. With Aristotle there was also an idea that
you shared wealth with a wider community, which in his case was the polis, the
political community (of men and non-slaves).


Even when we exchange with people we do not love we had
ethical obligations. For Aquinas exchange involved a just price – the price that
emerged through haggling that cleared the market – but, and this is crucial, a
just price is not imposed or experienced by some parties under conditions of
duress. To charge someone high prices because there was a famine was most
definitely not charging the just price.


So the context prevailing in the market is an issue too – indeed we can
extend this idea to include monopoly control of the market and other conditions.
Later in this talk I’ll argue that if you take away from people their means of
support, like access to the commons, this is also putting them under duress.


The early medieval period was characterised by power
structures somewhat akin to protection rackets where militarised hierarchical
gangs effectively imposed themselves on the people and extracted labour and
products, claiming that they had their authority and rights from God, but in
effect having their power from their ability and preparedness to act as ruthless
gangsters operating out of heavily fortified castles.


The church was no doubt complicit in all of this but it also acted as a form
of social welfare agency in difficult times when the aged, sick and poor could
turn to the monasteries. In addition, in England, the ordinary people had
certain rights to use the forests, the wastes and commons lands for their own
maintenance that were protected in the Charter of the Forests (the companion
statement of rights adopted at the same time as the Magna Charter).


The rise of the merchant class and of commercial
society in towns, and along trade routes outside the power of the military
elite, changed all of this over a number of centuries. With the Reformation in
England Henry VIII dissolved the monasteries and sold them to his courtiers
dismantling welfare provision for ordinary people.


Economic theory changed with the times. According to Aquinas merchants did
fulfil a useful function of bringing goods from where they were abundant to
where they were scarce. However, that’s not all that they did. For example they
helped create economic conditions where it paid the elite to take the commons
land from the commoners to enrich themselves (with sheep for the wool trade).
And trade could be in slaves or the goods from slave plantations – or from
products extracted by taxes in colonies. In other words under conditions of
duress.


Increasingly economics reflected the technical issues of the time, rather
than being a theorisation of the morality of the market.
Over several centuries the commons land was enclosed and the people using it
lost their rights to sustenance. These processes meant they had to work for the
emerging capitalist class as wage labourers or pay rent to the landowners on
onerous terms. The price of labour and the price of land was the result of an
institutionalised form of duress in that the ordinary people had no other
options but to work on terms set by employers and landowners.


Elite theorisation of economics turned a blind eye to
these processes, including in the ideas of Adam Smith in the 18the century.
Smith was a professor of moral philosophy and was no doubt aware of scholastic
economics. However for several centuries economic thinking had been changing
from the ethical reflections of monks into more hard bitten ideas about how
merchants and the aristocracy made money and accumulated wealth.


Thus Smith did not mention the Atlantic slave trade and plantations which
created the wealth that flowed into places like Glasgow. Nor did he consider
pillaging of India by the East India company. This international trade involved
economic arrangements nothing like his cosy picture which he wrote about,
although he must have been aware of it as the source of the riches of people in
his own world.


Smith’s inquiry into the Wealth of Nations was not
concerned with ethical issues about distribution and looking after the poor. He
regarded himself as living in a different kind of age, an age of improvement –
the commercial society had changed the game as far as economics was concerned.
So Smith wrote about how more primitive societies might be more equalitarian –
but, in his own society the labouring classes had their needs met and the more
important thing was that the division of labour, specialisation, was making
possible a continuous improvement in production . Thus everyone was much better
off, even if unequally so.


Not for the first time or the last Smith was another economist who ignored
less uplifting aspects of reality and chose to describe the further development
of specialisation and of the market as the future for commercial society.
Note that in this respect the monkish idea of progress as moral progress had
slipped into an idea of improvement as technical progress which produced more
wealth. Scarcity was the chief problem facing humanity and overcoming scarcity
was the chief task. This meant resources were to be used as efficiently as
possible and technological progress would allow for more to be produced.
If you like scarcity became the original sin of the new economic religion
and efficiency and technological progress became the new means of salvation –
with economists functioning rather like a new priesthood, a role that they still
enjoy. Indeed, for the contemporaries of Smith in this period the production and
use of this greater wealth, would bring about better people directly and
indirectly – because the commercial society had its own virtues and rewarded
hard work, discipline, thrift, delayed gratification etc.


Of course, people still realised that human and social
relationships were not always just, and that the ends that people pursued were
less than perfect. However, it was increasingly assumed that these problems too
required economic and technological progress. It would be when people were all
much better off that they would be able to get to grips with these problems.


The slide on the right quotes philosopher David Hume, a contemporary of
Smith. This idea is still with us today and has been shared by many subsequent
thinkers. Karl Marx thought that the highest phases of communism would be
prepared by the ability of capitalism to create an economy of abundance. In this
context all sorts of problems between people would “wither away”. Without
believing in the need for revolution Keynes also believed that in the distant
future humanity would overcome its scarcity problem and thus its psychology of
self interestedness. (See his essay, “The Economic Possibilities for our
Grandchildren” published in Essays in Persuasion). The problems for
humanity were no longer problems between people and God (or between people and
Nature) nor between people – they were problems of inadequately developed
technology.


Even more important was Smith’s abandonment of the
ideas of Augustine and Aquinas, about an obligation in economic activity,
towards loving your neighbour. For him a properly working market delivered
socially beneficial results even though people were pursuing their self
interests – or perhaps I should say, because people were pursuing their own self
interests.


The famous quote from Adam Smith on the slide illustrates this idea.


Having abandoned considerations of distribution which were rooted in ethical
considerations of love for one’s neighbour and ones obligations to a wider
community, the new economics asserted that by pursuing one’s private advantages
– and self love – the market would in any case organise a social outcome in the
interests of everyone.


In this theory people got what they wanted through the “invisible hand” of
the market because if they decided they wanted more beer and less bread they
would seek to buy more beer and less bread, the price of bread would fall and
that of beer would rise. Some bakers would switch to brewing and some farmers
would switch from wheat for flour to hops and barley for brewing…Prices would
act as signals that resources needed to be re-directed. As long as there were no
restraints to resources flowing from one use to another there was no need for
the state to intervene.


This was not a revolutionary new idea in his day –
these kind of ideas that the market activities motivated by self interest,
delivered what people wanted, can be found over a hundred years before Adam
Smith. Moreover we should try to understand it as contemporaries would have
understood it. Humanity had fallen – we’re sinners. And yet God had a
providential plan for the world and he realised his plan through the self love
of people operating through the “laws of the market”, that Smith described. At
the time of Smith it was big thing that Newton had showed that things did not
happen because of continual interventions by God. So instead people now thought
that God set up the basic design of the universe and then it ran itself. In a
similar way, the market and the “social physics” of economics worked through the
predictable self interested behaviour of people giving rise to economic laws. As
the poet Pope put it: “Thus God and Nature formed the general frame, And bad
self-love and social be the same”.
Later economists assumed that the famous invisible hand of the market meant
the operation of the price system and competition so that, without any central
plan, the market self-organised the allocation of resources. If there were too
much bread and not enough beer the bread would remain unsold and its price would
fall whereas the price of beer would be bid up. So then resources would switch
from bread production to beer production quite spontaneously, as long as markets
were competitive and the beer producers could not prevent others from brewing to
keep beer prices up.


It’s a nice parable but what economists are well aware
of is that prices and the allocation of resources depends on the prior
allocation of rights to the different factors of production. What was being
ignored and relegated to the small print was what Aquinas had been aware of –
the issue of duress. Smith was an apostle of the market and commercial society
at a time when labour and land were being forced into becoming market
commodities by land enclosure and when the state, by attacking the poor law for
the support of destitute people, was ensuring that the poor worked on terms that
can be dictated by their employers.


Neither land nor labour are originally “produced” with the explicit purpose
of becoming commodities. Land is part of the living natural system and labour is
people who have been forced to work on terms dictated by the owners of the means
of production.


In this context the market does indeed produce according to the wishes of
those with purchasing power – but how purchasing power is distributed,
reflecting the economic and property system, was the deeper question.
As is usual the new economic priesthood avoided these questions and, as the
19th century progressed, devoted themselves instead to a deeper study of how
people, motivated by self love and self interest, behaved. What determined their
choices? This they did by using another framework from philosophical ethics,
namely the utilitarian philosophy developed by Jeremy Bentham and then by John
Stuart Mill. (The picture is of the corpse of Jeremy Bentham, with his head at
his feet in a glass box at the London School of Economics).
Let me briefly compare Bentham and Mill’s moral philosophy to other schools
of moral philosophy. Whereas Aristotle had an ethics based on developing ones
virtues as a person, and the church an ethics based on explicit and written
codes and principles and duties, the utilitarians had an ethics based on
consequences. This consequentialist view was grounded in the idea that what
mattered was whether actions gave rise to subjective states of pleasure or pain
(utility or disutility).
The idea of utility was to be found in scholastic and early economics but to
this school the utility of an object meant its fitness for its intended purpose.
Now utility was given a different meaning – it was the ability of an object or
service to give rise to a sense of subjective happiness, satisfaction or
dissatisfaction. The criteria for an optimal decision then became the greatest
happiness for the greatest number of people. But how did you measure this
subjective state?


Economists came up with a solution – there were no
absolute measures of utility but this did not matter because in choosing between
options people demonstrated in practice what their comparative utilities were
between different goods. They demonstrate their relative preferences by what
they are prepared to pay as they allocate their limited purchasing power between
different purchasing options for goods and services. What people are prepared to
pay is a proxy measure of their utility for the last unit of a good that they
purchase.


This idea of willingness to pay (or willingness to accept in payment) is then
used by economists as a proxy measure for how much people value things that do
not normally appear on markets. It is thought to be a convenient idea too
because the same situation can involve losers as well as winners, and here is an
idea here that this can be solved by cash compensation payments. If an action
involves increased welfare for one person and decreased welfare for someone else
then it still might involve a greater happiness overall and one can tell that is
so if the gainer can compensate the loser and still be better off. (This is the
so called Kaldor Hicks principle. Note that winner does not actually have to
compensate the loser, they merely have to be able to in theory).


What people are prepared to pay thus measures how much
things matter to them – their ethical values were reflected in their monetary
values. Economists are enthused with this idea as it appears to them to give a
common measuring rod that can be used for all sorts of situations, including
policy decisions about issues that do not normally appear in an ordinary market
at all – for example, environmental decision making.


Thus the importance of protecting a species threatened with extinction is
measured by what people are prepared to pay to protect it – or prepared to
accept in compensation if it goes extinct.


This is actually nonsense because it assumes informed preferences and most
people do not have preferences about such natural things as they live separated
from the species anyway. What’s more it leads to a beauty contest where pandas
and popular animals would score highly but the creepy crawlies or snakes that
are crucial parts of eco-systems get no offers to pay at all. If people are then
informed about the species and the ecological issues the obvious point to make
is that value is created by being informed about the things, highlighting a need
for education, not by spontaneous preferences.
So this point of view is highly challengeable and it has been claimed that
economists are involved in corruption – see right.


This leads me on to what it is economists actually do –
and why these things matter. And the answer is that economists are actually
there as advocates for a particular kind of value system. They are not unlike
priests whose job it is to argue for their belief system.


This is a quote from economist Robert Nelson who describes what it was like
to work as an economist in the US Department of the Interior which was and is
responsible for the upkeep of national parks and landscapes in the USA:


“If economists had any influence—which they sometimes did, if rarely
decisive—it was seldom as literal ‘problem solvers.’ Rather, the greatest
influence of economists came through their defence of a set of values. Much of my
own and other efforts of Interior (Ministry) economists were really to persuade
others in the department to act in accordance with the economic value system, as
compared with other competing priorities and sets of values also represented
within the ranks of the department.” Robert Nelson Economics as
Religion
Pennsylvania State University Press, 2001 p xiv
So how do economists actually do this?


 


In fact economists mostly create models from assumptions that are assumed to
be self evidently true…or claimed to be true enough for practical purposes.. and
then analyse the logical consequences with mathematic symbols and diagrams. With
enough simplified assumptions it then seems possible to show that competitive
markets deliver efficient outcomes defined in the way economists want.
What is involved here is actually an implicit theory of how human beings are, what makes them tick. Using this approach it seems reasonable to economists to theorise human beings as if they act in a predictable way – calculating their individual self interest to maximise their utility and then acting accordingly. This makes possible a deterministic view of human action that allows economists to model markets. Of course, markets are places where there are lots of actors but the assumption is made that to get a collective picture of what happens you add up the actions of all the separate individuals as if they do not influence each other. There are no group dynamics in this situation. This is called methodological individualism and diverges a lot from the assumption of the scholastics – that people are providing for others too, including those that they love.Then you make a whole load of other assumptions, the effect of which is to make market behaviour completely predictable in a way that can be modelled in mathematics and diagrams. Such assumptions include the idea that people have all the information that they need about now and the future, do not change their preferences, act only out of self interest and yet act honestly, act in competitive markets, that there are no transaction costs…Most of these premises were nonsensical. Not only were markets not competitive, but people do influence each other when it came to market actions – which accounts for the collective irrationality of market bubbles, for example, when people look to each other for the way the market is evolving and their collective optimism becomes self reinforcing.In fact the market is always shot through with a lack of information and/or information asymmetry. People make mistakes, operate without enough knowledge and so on. This is not to mention that fact that if people really are only motivated by individualistically calculated self interest it is difficult to know why they should not resort to various types of crime. There’s often an implicit assumption of honesty in these models but in real life markets are prone to fraud and opportunism, to secrecy and misleading accounts of product quality. All of these things mean market outcomes are often far from the ideal pictured in the theory. 

Of course, if you assume away the real world in your models then, surprise
surprise, these models deliver ideal allocation outcomes – or they do on the
blackboard and in the lecture theatre in the groves of academe, if not in real
life. But what has happened is that conclusions are manufactured based on
premises initially assumed. This may happen in very sophisticated mathematics so
that mere muggles don’t understand it but that’s what the wizards are doing.
(Today’s leading economic textbook writer, Greg Mankiw, has described
non-economists as ‘muggles’, the ordinary people without magical powers,
described in the Harry Potter novels. His implication is that economists are
like wizards.)
As I have said the key to all of this is based on an idea of what people are
like. There is an implicit modelling of human beings here. Certain types of
behaviour (the type that allows economists to model people and markets
predictably) is called “rational”.


You may think that this description of how people are
and how they behave is meant by economists to be applicable only to economic and
market activities. But if people are calculating their individual self interest
in their economic dealings why should one assume that they do not do the same
thing in their political, their social and their interpersonal dealings? Should
we not also assume that government officials are calculating their interests
too? At the very least, why should contact between business and government not
lead to a cosy relationship, particularly if people can leave government posts
and get lucrative jobs with industry? What about bribes and kick-backs from
business for special favours?


When I studied economics at the end of the 1960s the textbooks, for example
by Paul A Samuelson, pictured a world where the state was essentially benevolent
and independent from business. A democratic process determined the policies the
state would adopt and economists were just technical advisers about the options.
They could regulate markets without being contaminated by the self interest
motivations of markets. The idea that the state could be captured by business
interests and the majority of the people were effectively excluded from real
influence was not there.


This began to be replaced by another view of the relationship between
business and the state spearheaded by the Chicago School.
The idea that the state could be captured by interest groups led to a kind
of market fundamentalism by the Chicago school. The ideal was to go all the way
and for the state to be driven out of market activity altogether if at all
possible.


 


To the Chicago economists the rational calculating individual was a
description that could be applied to the understanding of all human behaviour,
not just that in the market place.
So, what framework do you use to explain racial discrimination? To Gary
Becker at Chicago, racism is a preference choice of who you want to live near
and employ. Note, he does not endorse or condemn Becker merely sees himself
explaining and drawing out the consequences.
The model of rational economic behaviour is then used by Becker and another
theorist, Richard Posner, to explain “love” , marriage and prostitution in a
utilitarian framework. Marriage is a relationship involving reciprocal service
provision which saves on transaction costs like pricing each service that a
couple provide for each other, or keeping accounts for these services. In this
framework prostitution is a “spot” sexual transaction where it is “more
efficient” to pay for the service in money.

It is used to explain crime too. Most people don’t steal because it would
not be profitable but in the life circumstances of criminals the rational
maximisation of costs and benefits of crime does make it pay according to
Becker. This is another form of the redistribution of income in the same broad
category as government welfare programmes.


The trouble with this view is that it is at best
tautologically true in a sense that is banal – people do things because they
want and thus they must get satisfaction or utility from doing and deciding what
they do. However this banality makes little sense of the many actions and people
who do things where they are conflicted – where they act in ways that involve
self sacrifice for moral reasons, where there is genuine anguish about their
difficult decisions, where they do things because they think they ought to, not
because it gives them any satisfaction at all.


At the same time this way of analysing things has important aspects of being
a toxic self fulfilling prophecy and contributes to the ethical degradation of
society.


In fact psychologists have looked at what motivates
people all around the world in different cultures and have come up with a
picture of the varieties of motivations. This picture includes the ideas of the
economists in values in the bottom left hand quadrant but makes no sense of the
many other motivations that people have demonstrated in this diagram by Common
Cause.
http://valuesandframes.org/handbook/


Many of these are not simply
different self interested “preferences” in a utilitarian sense. For example many
of the spiritual and community and environmental motivations involve serving a
higher purpose which involves transcending or going beyond the self. These are
intrinsic motivations which can involve a different “life game” in the sense
meant by the critic of psychiatry, Thomas Tzsas; purposes to give meaning and
direction in life. http://www.bgmi.us/web/bdavey/Life.htm


If the assumptions of what “rational economic man” are
like do not accurately describe many people, they probably do accurate describe
many economists and those trained by them. There is a saying in the Talmud, “We
do not see things as they are, we see things as we are” and this probably does
describe how many economists actually think and decide.


There are important respects in which the economic viewpoint functions as a
belief system which is now shaping how things are in the form of a self
reinforcing or self fulfilling prophecy. The point is that the economist’s view
of the world actually serves to create the very mindset that it describes.


For example, a study of economic and non economics students in 1993 by Frank,
Gilovich and Regan found that most people learn to be more co-operative as they
get older – but that learning economics slows this process of social maturity.
While students in other disciplines learn to be cooperative over college years,
students majoring in economics learn the same fact much more slowly.” It seems
that micro-economics teaching over as little as 4 months can have a noticeable
effect:


“They picked three classes at Cornell University. Two of these were
introduction to microeconomics. The third was introduction to astronomy. In the
first microeconomics class (class A), the professor was a game theorist with
interests in mainstream economics, and he focused on prisoner’s dilemma and how
cooperation might hinder survival. In the second microeconomics class (class B),
the professor’s interests were in development economics and he was a specialist
in Maoist China.


To the students in all these introductory classes, the authors posed simple
ethical dilemmas, including questions such as “If you found an envelope with
$100 with the owner’s address written on it, would you return it?” The questions
were asked twice, first in September, in the beginning of the fall semester and
once again during the final week of classes in December, not even a full four
months apart.


Comparing results against the
astronomy control group, students in economics class A became much more cynical
and gave less ethical responses at the end of the semester. Students in class B
grew to be more unethical, yet not by so much compared to students in class A.
The results clearly show that no matter what their initial ethical tendencies
were, students who were exposed to a mere four-months of “rational” reasoning
became less cooperative.”
http://www.psychologytoday.com/blog/the-decision-lab/201104/why-does-studying-economics-hurt-ethical-inclinations


In important respects there is evidence that departments of economics have
become departments for the promotion of anti-social behaviour.


An early Chicago economist called Frank Knight made the
observation that one requirement for markets to work efficiently is that people
are honest. If they are not honest then things get more complicated – the
transaction costs start to rise. You need to spend time checking out your
suppliers or customers, you need to work longer on creating water tight
contracts. You need to take court action more often with huge costs involved. In
the small town world of Adam Smith if the butcher, the baker and the brewer
ripped each other off the dishonesty would soon get noticed and eventually they
would be likely to lose out from their dishonesty. Federal Reserve Chair Alan
Greenspan and the de-regulators of the 1990s and the early 21st century clearly
did not see the world they lived in like that.


Yes, Adam Smith’s market self organised the supply of the goods that people
want. But markets can self organise criminal activity and anti social behaviour
too.
And this can be on a massive scale. When the American banks created
financial instruments out of loans to people with no income and no assets, got
them judged to be AAA quality they then sold these toxic fraudulent instruments
victims all over the world. The financial victims that purchased them had no
easy way of checking if they were safe investments and assumed that if rating
agencies said that they were AAA then they were. All told there were probably up
to a half a million criminal felonies that took place in this period.
So economics has come a long way. The ideas of the scholastics were
compatible with what could be found in the Bible in the First Epistle to Timothy
in the New Testament, that “The love of money is the root of all evil”. In the
17th and 18th century the idea was that God worked through individual self
interest to create a society delivering in the interests of everyone. This has
now morphed into economics becoming a virtual religion in its own right with
theology for rich people who love money.




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Offline RE

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Re: Economics & Moral Philosophy
« Reply #7 on: October 21, 2012, 07:05:03 AM »

I'd love to put this one up on the Blog, but my last try with FEASTA for a Cross Posting Agreement got no response.  I'll try again with this one.  Meanwhile, I converted it to BBcode to drop in here inside the Diner.

Further reading through the FEASTA site, I found that Brian Davey licenses his articles under Creative Commons terms, which means anybody can republish for non-commercial use, so I CAN publish this on the Diner blog "ethically"!  YAY!

RE
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